Analysis of Tokenization Technology for Real-World Assets

Tokenization of real-world assets ( RWAs ) is a digital Token recorded on the blockchain, representing ownership or legal rights to tangible or intangible assets. The scope of tokenization is broad, including real estate, commodities, artworks, intellectual property, and financial instruments.

Tokenization enhances asset liquidity, making investment opportunities more accessible. The immutable ledger of blockchain ensures transparent ownership records, reducing the risk of fraud. Tokenized assets traded on decentralized exchanges bring unprecedented market accessibility and efficiency.

According to the analysis, it is expected that by 2030, the total market value of various tokenized assets ( excluding cryptocurrencies and stablecoins ) will reach approximately 2 trillion USD, with a pessimistic scenario of 1 trillion USD and an optimistic scenario of up to 4 trillion USD. These estimates do not include stablecoins to avoid double counting.

Current System

Tokenization of real-world assets is the representation of off-chain asset ownership in the form of digital tokens through blockchain or similar distributed ledgers. This process connects the characteristics, ownership, and value of the asset with its digital form. Tokens, as digital holding instruments, enable holders to assert ownership of the underlying assets.

Historically, physical certificates were used to prove asset ownership, but they were vulnerable to theft, loss, forgery, and money laundering threats. In the 1980s, digital holding tools began to emerge, but they were limited by the technology of the time. The financial industry turned to centralized electronic registration systems to record digital assets, but this introduced new costs and inefficiencies.

System Based on Distributed Ledger Technology

The development of distributed ledger technology ( DLT ) makes it possible to re-examine the concept of digital securities or tokens.

DLT consists of a series of protocols and frameworks that enable computers to propose and validate transactions over a network while keeping records synchronized. By decentralizing record keeping, this technology reduces administrative burdens, decreases the risk of system failures associated with reliance on central entities, and makes systems more resilient.

The DLT-based system simplifies the transaction execution, clearing, and settlement processes through a single consensus mechanism, making it more efficient compared to the handling by multiple intermediary institutions in traditional systems.

Decentralized Solutions

Blockchain is a distributed ledger technology that operates through a decentralized computer network. Tokens can be issued on private permissioned chains and public permissionless chains.

Private permissioned chains are controlled by a central entity, restricting access for specific users. Public permissionless chains do not require central authority control and are open to all users. Tokens on public chains can be integrated with DeFi protocols, enhancing usability and value.

The choice of blockchain determines the level of control that the issuer can maintain. Public chains grant the issuer less control, and the choice should align with the issuance goals and Token functions.

A key advantage of asset tokenization is the automation achieved through smart contracts. Smart contracts are programs on the blockchain that execute automatically when certain conditions are met. This automation enhances efficiency and security, enabling faster and lower-cost transfers.

Tokenization Methods

The tokenization of real-world assets can be analyzed from two dimensions: representation and ownership. Representation includes the economic characteristics of the assets, while ownership verification requires on-chain or off-chain ledgers.

Digital augmented assets maintain ownership through off-chain ledgers while using blockchain tokens as digital representations. Digital native assets are essentially digitized, with tokens directly representing value and ownership.

Tokenization has four main methods:

1. Direct ownership: The token itself serves as the official record of ownership, applicable to digital native assets.
2. 1:1 asset-backed Token: The custodian holds the assets and issues tokens that represent direct rights.
3. Over-collateralized Token: Asset tokens are issued by collateralizing different assets, usually over-collateralized.
4. Insufficiently collateralized Token: Issuing tokens that track the value of certain assets but are not fully collateralized carries higher risks.

The Advantages of Tokenization

Tokenization of real-world assets mainly enhances efficiency through distributed ledger technology:

1. Atomic settlement: Smart contracts execute both stages of a transaction simultaneously, eliminating counterparty risk and improving speed and efficiency.

2. Liquidity Enhancement: Tokenization enhances the transferability of assets, making non-tradable assets tradable. Smart contracts simplify processes and reduce transaction costs.

3. Reduce intermediaries: Smart contracts replace traditional intermediaries to verify data, automate asset ownership transfer, and other processes.

4. Achieve Automation: Smart contracts automatically execute predefined conditions, simplifying manual tasks and improving efficiency.

5. Promote Compliance: Code compliance requirements such as KYC and AML into the blockchain to achieve more efficient and unified compliance.

6. Automated Market Maker: Smart contracts automatically match buyers and sellers through an asset pool, reducing costs and improving performance.

Risks and Costs

Tokenized assets face challenges in technology and regulation. Technical risks include cybersecurity, scalability, stability, and more. Regulatory issues involve anti-money laundering, governance, identity verification, data protection, and others.

In addition, there is complexity brought about by investor behavior and market dynamics, which requires education and awareness promotion. On the environmental front, the high energy consumption of blockchain consensus mechanisms has also raised concerns.

Transitioning to a tokenized financial system involves significant costs, including infrastructure changes, system integration, and employee training. Addressing these multifaceted challenges is crucial for fully realizing the advantages of tokenization.